Supreme Court, New York County, August 17, 2020

Foster & Wolkind, P.C., New York City (Peter B. Foster and Bryan E. Wolkind of counsel), for plaintiff.

Rick Geller, LLC, Great Neck (Rebecca Ryland Cusick of counsel), for defendants.

Plaintiff, Pirs Capital, LLC, entered into a transaction with defendant D&M Truck, Tire & Trailer Repair Inc. that on its face was a purchase by Pirs Capital of D&M's future receivables, guaranteed by D&M's principal, defendant Jeremy O'Neil. D&M ceased turning over its receivables to Pirs Capital as required by the agreement, contending that the transaction was in reality a usurious loan. Pirs Capital now sues to enforce its contract with D&M and the guarantee executed by O'Neil.

This action stems from defendants' alleged default on a merchant agreement and security agreement (agreement) that plaintiff and D&M entered into on August 27, 2018. According to the allegations of the complaint, under the agreement plaintiff purchased $316,050 in D&M's future account receivables. (See NY St Cts Elec Filing [NYSCEF] Doc No. 30.) At the time of signing, plaintiff paid D&M $245,000. (See NYSCEF Doc No. 22 at 2.) The agreement called for D&M to pay plaintiff its future receivables by allowing plaintiff to debit from its depository bank account 12.1% of its transactions every weekday until the $316,050 was paid in full. (See NYSCEF Doc No. 30 at 1.)

The parties also executed an amendment to the agreement. (See NYSCEF Doc No. 31.) Under the amendment, instead of allowing plaintiff to debit a percentage of its transactions D&M agreed to remit to plaintiff $1,225 every weekday, subject to periodic adjustments, until the total amount of the receivables purchased was turned over to plaintiff. (See NYSCEF Doc No. 31 at 1-2.) Furthermore, under the agreement, O'Neil signed a personal guarantee of all representations, warranties, and covenants made by D&M to plaintiff under the agreement in the event D&M breached its obligations, was unable to pay, or went bankrupt. (See NYSCEF Doc No. 30 at 11.){**69 Misc 3d at 459}

In accordance with the agreement and amendment, D&M remitted to plaintiff the sum of $6,125 per week through February 8, 2019. On February 15, 2019, D&M allegedly defaulted and breached the agreement by blocking or otherwise compromising plaintiff's access to its depository accounts. The amount that D&M had turned over to plaintiff by the time of its alleged default was only $147,000 of the $316,050 in purchased receivables, leaving $169,050 remaining. (See NYSCEF Doc No. 22 at 3-5.) Defendants have maintained, though, that plaintiff could not properly collect the money owed under the contract at issue because the contract is a prohibited usurious loan. Defendants contend, among other things, that D&M's receivables were transferred to a third party years before the transaction at issue here, and thus could not have been purchased by plaintiff. (See NYSCEF Doc No. 39 at 3-4.)

Plaintiff's amended complaint asserted a claim for breach of the contract (by D&M) and breach of the guarantee (by O'Neil), seeking both the amounts that remained unpaid at the time of D&M's alleged default and attorney fees incurred in seeking to enforce plaintiff's contractual rights. Plaintiff also asserted a fraud claim, in light of defendants' contention that they had already transferred away D&M's future receivables when defendants contracted with plaintiff. Defendants answered, raising various affirmative defenses and a counterclaim for a declaratory judgment that the underlying transaction was a usurious loan.

Plaintiff now moves (i) for summary judgment under CPLR 3212 on its contract and fraud claims; (ii) to strike under CPLR 3211 (b) defendants' counterclaim; and (iii) to strike under CPLR 3211 (b) defendants' affirmative defenses. The branch of plaintiff's motion seeking summary judgment in its favor is granted; the branch of plaintiff's motion seeking to strike defendants' counterclaim is granted; the branch of plaintiff's motion to strike defendants' affirmative defenses is denied as academic.

A court should grant a motion for summary judgment under CPLR 3212 when there are no triable issues of fact and the moving party is entitled to judgment as a matter of law. (See Alvarez v Prospect Hosp., 68 NY2d 320, 324-325 [1986].) The movant must make an initial [*3]prima facie case demonstrating the absence of material issues of fact and entitlement to judgment.{**69 Misc 3d at 460} (See Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985].) If such a showing is made, the nonmovant must then "present evidentiary facts in admissible form sufficient to raise a genuine, triable issue of fact." (Mazurek v Metropolitan Museum of Art, 27 AD3d 227, 228 [1st Dept 2006].) Mere conclusions or unsubstantiated allegations are not sufficient. (See Corcoran Group v Morris, 107 AD2d 622, 624 [1st Dept 1985], affd 64 NY2d 1034 [1985].)

I. Whether the Parties' Transaction is a Receivables Purchase or a Usurious Loan

Plaintiff is asserting a breach-of-contract claim under both its contract with D&M and O'Neil's personal guarantee of D&M's contractual obligations. Defendants do not dispute that D&M failed to make payments required under the agreement and its amendment, or that O'Neil failed to make payments required under the guarantee after D&M's contractual default. Instead, defendants argue that factual disputes exist about whether the contract was a prohibited, criminally usurious loan, rather than a legal purchase of future receivables. (See NYSCEF Doc No. 23 at 2.) If the contract is a usurious loan, plaintiff cannot recover on the contract or the guarantee.^[FN1]

A party raising a usury defense must satisfy a heavy burden. An agreement cannot be usurious unless it is a loan or forbearance of money. It "must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender." (Donatelli v Siskind, 170 AD2d 433, 434 [2d Dept 1991].) And this defense "must be established by clear evidence as to all the elements essential thereto." (Giventer v Arnow, 37{**69 Misc 3d at 461} NY2d 305, 309 [1975] [internal quotation marks omitted].) Thus, "when the terms of the agreement are in issue, and the evidence is conflicting, the lender is entitled to a presumption that he did not make a loan at a usurious rate." (Id.)

Defendants make two principal arguments why the transaction here was a usurious loan, rather than a purchase of future receivables. First, they contend that the transaction simply could not have been a receivables purchase (and thus was necessarily a loan): according to defendants, Pirs Capital was aware at the time of the transaction here that D&M had already pledged its [*4]future receivables to a third party. (See NYSCEF Doc No. 39 at 4-5.) Second, defendants contend that the terms of the agreement and amendment indicate that the transaction was a loan. This court concludes as a matter of law that defendants' arguments are without merit.

First, defendants have not submitted admissible evidence raising a factual dispute about D&M's putative 2014 receivables transfer. Defendants do not provide an affidavit on personal knowledge to support their assertions that (i) D&M had already sold or transferred its future receivables at the time of the transaction at issue in this case; and (ii) Pirs Capital was aware of that prior transfer. Defendants also do not provide a copy of the transfer agreement, or comparable documentation evidencing the transfer. Nor do they provide any documents indicating Pirs Capital's actual awareness of the transfer.

At most, the affirmation of counsel on which defendants rely attaches a copy of a 2014 UCC-1 financing statement, prepared by a third-party factoring company, that lists D&M's future receivables as collateral. (See NYSCEF Doc No. 40.) That financing statement, though, shows only that as of 2014 a factoring company held a security interest in D&M's future receivables. The statement does not show where that security interest came from (whether through a transfer of receivables, a separate loan, or otherwise). The record does not indicate whether the security interest, whatever its source, was still in place when plaintiff putatively purchased D&M's future receivables in 2018, four years later.^[FN2] Nor does the record reflect {**69 Misc 3d at 462}whether Pirs Capital was actually, rather than merely constructively, aware in 2018 of the 2014 UCC-1 financing statement. This scanty showing is not sufficient to create a factual dispute over whether the agreement between the parties was merely a loan masquerading as a purchase of (already pledged) receivables.

Second, applying the governing three-part test, this court concludes that the terms of the contract between the parties demonstrate as a matter of law that this contract was in the nature of a purchase of future receivables, not a loan. (See LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664, 665-666 [2d Dept 2020] [describing the test for distinguishing between loans and receivables purchases].)

The first prong of this test is whether the contract contains a reconciliation provision that allows the merchant (here, defendant D&M) to seek adjustments of the amount remitted to the purchaser (here, plaintiff). If a transaction does not have a reconciliation agreement, then it is more likely to be a loan than a purchase of future receivables. (See id. at 666; K9 Bytes, 56 Misc 3d at 816-818; see also Retail Capital, LLC v Spice Intentions Inc., 2016 NY Slip Op 32614[U], *2 [Sup Ct, Queens County 2016] [finding a transaction not to be a loan because "(t)he agreement provided a reconciliation on demand provision whereby the parties (were each) permitted to demand the monthly reconciliation of funds"].)

In this case, the agreement, as amended, contains a reconciliation provision. Section D of the amendment provides that

"[n]o less than every two (2) weeks after the funding of the Purchase Price to Merchant . . . either Purchaser or Merchant . . . may give written notice to the other Party . . . providing for an adjustment in the Specified Daily Amount based upon the daily [*5]average receivables during the preceding Calculation Period." (NYSCEF Doc No. 31 at 2.)

Defendants assert that no reconciliation ever occurred, and thus that the reconciliation provision was simply a sham to hide a usurious loan. But their only support for this assertion on this motion is an affirmation of counsel. (See NYSCEF Doc No. 39 at 7.) And even that affirmation does not state whether, for example, D&M ever requested an adjustment of the amounts being collected in order to account for the actual amount of its daily receivables.{**69 Misc 3d at 463}

The next prong of the test is whether the transaction is for a fixed (or finite) term or for a non-finite term. Ordinarily, a loan consists of a face value, repayable (with interest) over a finite period defined in the transaction documents. If a transaction instead has a non-finite term, that suggests that the transaction is instead a purchase of future receivables. In that scenario, the length of time required to complete the transaction will be contingent "upon the outside factor of customers actually shopping at [the merchant] and paying for products and services," thereby generating receivables for the purchaser to collect. (See IBIS Capital Group, LLC v Four Paws Orlando LLC, 2017 NY Slip Op 30477[U], *5-6 [Sup Ct, Nassau County 2017] [discussing this point].) Here, the agreement's repayment terms are non-finite. Section 2.2 of the agreement provides that "[t]his Agreement shall be in full force and effect until the Purchased Amount has been delivered to the Purchaser pursuant to the terms of this Agreement. Because the transaction evidenced by this Agreement is not a loan, there is no repayment term." (NYSCEF Doc No. 30 at 3.) Similarly, the amendment provides for the collection of a specified amount—subject to periodic adjustment—until the purchaser receives the full purchased amount. (See NYSCEF Doc No. 31 at 1.)

The third and final prong of the test is whether the purchaser has any recourse in the event of the merchant's bankruptcy. If the purchaser does have recourse, especially through a personal guaranty, that is a consideration pointing toward treating the agreement as a loan rather than a receivables purchase. (See K9 Bytes, 56 Misc 3d at 816-818.) Here, although the merchant going into bankruptcy is not itself listed as an event of default (see NYSCEF Doc No. 30 at 4-5), O'Neil's personal guarantee provides that in the event of the merchant's bankruptcy he is required to perform the merchant's obligations under the agreement (see id. at 11). This recourse provision weighs to some extent in favor of treating the transaction here as a loan. (See K9 Bytes, 56 Misc 3d at 817-818.) At the same time, though, the scope of O'Neil's obligations under the recourse provision of the guarantee is itself limited by the contingent nature of the merchant's obligations under the agreement in light of the reconciliation provision.^[FN3]

Ultimately, this court agrees with the court in K9 Bytes that notwithstanding the recourse provision, the other aspects of{**69 Misc 3d at 464} the transaction render the agreement and amendment "sufficiently risky such that they cannot be considered loans, as a matter of law." (56 Misc 3d at 818.) That is, "[u]nder no circumstances could [plaintiff] be assured of repayment, because its agreements are contingent on a merchant's success, and the term is indefinite."^[FN4] (56 Misc 3d at 818.)

[*6]II. The Appropriate Disposition of the Different Branches of Plaintiff's Motion

Plaintiff is entitled to summary judgment on its claim against D&M for breach of the agreement and amendment, and its claim against O'Neil for breach of the guarantee. Plaintiff also seeks summary judgment on its claim against defendants for fraud, arising from defendants' contention that they had transferred away their future receivables prior to entering into a contract with plaintiff. Plaintiff's summary judgment papers, though, expressly frame this claim as being asserted in the alternative. (See NYSCEF Doc No. 26 at 6 ¶ 23.) Given this court's disposition of plaintiff's breach-of-contract claims against defendants, plaintiff's motion for summary judgment on its fraud claim is denied as academic.^[FN5] Plaintiff's request for punitive damages is denied.

Plaintiff is also entitled under the agreement (as guaranteed by O'Neil) to collect reasonable attorney fees incurred by plaintiff in pursuing plaintiff's contractual remedies in the event of a breach of the agreement. (See NYSCEF Doc No. 30 at 5.) Defendants do not dispute the reasonableness of the fee claimed by plaintiff's counsel in his affirmation in support of the motion. (See NYSCEF Doc No. 26 at 29.) Plaintiff therefore also is entitled to summary judgment on its attorney-fee request.

Given this court's disposition of plaintiff's motion for summary judgment and the branch of the motion to strike defendants'{**69 Misc 3d at 465} counterclaim, plaintiff's motion to strike defendants' affirmative defenses is denied as academic.

Accordingly, it is hereby ordered that the branch of plaintiff's motion seeking summary judgment under CPLR 3212 is granted in part to the extent set forth above, and otherwise denied; and it is further ordered that plaintiff is awarded $169,050 (with interest from Feb. 15, 2019), plus attorney fees in the amount of $5,250, plus costs and disbursements to be taxed by the Clerk of the Court upon submission of an appropriate bill of costs; and it is further ordered that the branch of plaintiff's motion seeking under CPLR 3211 (b) to strike defendants' counterclaim is granted; and it is further ordered that the branch of plaintiff's motion seeking under CPLR 3211 (b) to strike defendants' affirmative defenses is denied as academic; and it is further ordered that plaintiff is to serve notice of entry on defendants, on the office of the General Clerk, and on the office of the County Clerk, which shall enter judgment accordingly.